Inside Investor Relations – Volume 21: A Closer Look at Taiwan’s “Corporate Governance 3.0”
In the past Inside Investor Relations series, we have mentioned that more and more investors care about ESG and incorporate it into investment decision-making process (please refer to Inside Investor Relations – Volume 8 – Should companies invest in ESG? ). Among ESG, corporate governance could help corporates weather crisis, and a sound corporate governance is the key to build trust with shareholders. In Taiwan, corporate governance is sometimes a box ticking exercise. Some companies think that it is enough just to meet the legal requirements and responsibilities. However, only by rooting corporate governance as part of corporate culture can the company truly achieve sustainable development. Therefore, in order to strengthen Taiwan corporate governance and to be in line with international standards, the Financial Supervisory Commission (FSC) launched the “Corporate Governance Roadmap 2013”, and started the first corporate governance evaluation in 2015, followed by the “Corporate Governance Roadmap (2018-2020)”. Currently, in order to accelerate the development of corporate governance in Taiwan and keep pace with the changing capital market, the FSC has launched a three-year “Corporate Governance 3.0 - Sustainable Development Roadmap” (hereinafter referred to as CG 3.0). This article will analyze the current situation of corporate governance practices in Taiwan, and summarizes some measures and regulations related to listed companies in the CG 3.0
Board Diversity
Companies should establish the position of independent directors to set a robust corporate governance framework. Even if the company has been listed publicly, the boards which controlled by family members often ignores the rights of minority shareholders, and independent directors play a key role in balancing the conflicted interests. Hence, in the CG 3.0, applicants for initial TWSE/TPEx listing, companies with a paid-in capital of NT$10 billion or more, and TWSE/TPEx-listed financial institutions and insurance companies will, starting in 2024, be required to have independent directors make up no less than one third of the directors. In addition, the boards with a good mix of age, experiences, and educational backgrounds tend to foster constructive ideas and decisions. Therefore, the FSC will revise the regulations to require companies to disclose the distribution of board by gender, expertise, and age, and also disclose the goal and the execution of board diversity policy in 2021.
Strengthen duties and functions of boards, and independence of independent directors
In order to strengthen duties and functions of boards, in the CG 3.0, all TWSE/TPEx-listed companies are required to appoint a chief corporate governance officer. The chief corporate governance officer plays a role as a bridge between the boards, the internal business units and authorities, and is responsible for handling of matters for board meetings and shareholders meetings, assisting in providing required information and in the directors’ compliance of law. (For more information about the qualifications and affairs of the chief corporate governance officer, please find “Taiwan Stock Exchange Corporation Operation Directions for Compliance with the Establishment of Board of Directors by TWSE Listed Companies and the Board's Exercise of Powers”). In terms of strengthening the duties, functions and independence of independent directors, since the objectivity of the boards could be reduced by long tenured independent directors and the board may become a rubber stamp, the FSC prescribe the term limits of independent directors to ensure the board efficiency. In the CG 3.0, TWES/TPEx-listed companies are required to have 50% or more of the independent directors serve no more than three consecutive terms. This rule will start applying in 2024 and will apply to all listed companies no later than 2027.
Enhance ESG information disclosure
In addition to disclosing financial information, disclosure of non-financial information including environmental, social, and corporate governance has become an important communication channel with stakeholders. In 2014, Taiwan Stock Exchange and Taipei Exchange required companies in financial, insurance, food, and chemical industry, and companies with a paid-in capital of NT$10 billion or more to publish ESG report. In 2015, companies with a paid-in capital of NT$5 billion or more and also water-consuming, energy-consuming and high-polluting industries such as photoelectric, steel, and pollution remediation are required to publish ESG report. In the CG 3.0, companies with a paid-in capital of NT$2 billion or more are required to publish 2022 ESG report in 2023.
In addition, the FSC will strengthen the disclosure rules for sustainability reporting based on international guidelines, including TCFD (Task Force on Climate-related Financial Disclosure) and SASB (Sustainability Accounting Standards Board). Since dramatic climate change has a significant financial impact on business operations, the FSC expects companies to follow the TCFD framework to disclose the impacts of climate-related risks and opportunities on the companies’ business and strategy. The SASB identifies sustainability issues that are likely to affect the financial performance within an industry and sets standards for disclosure of each industry, which has become one of the most favored disclosure standards for global investors. Therefore, as more and more investors rely on ESG information disclosed by companies to make investment decisions. It is critical for companies to follow international guidelines when publishing ESG report.
Improve the timeliness and quality of information disclosure
In order to prevent stock market manipulation during the “window period” between the announcement of the third quarter financial results and the annual report, which is from mid-November to March of the coming year, the FSC will require TWSE/TPEx-listed companies to publish their previous year’s unaudited financial information within 75 days after the end of the fiscal year, and the rule will apply to companies by stages based on the size of paid-in capital.
Strengthen the conduct of shareholders’ meetings
The peak shareholder meeting season occurs in June every year. Shareholders may have to attend and vote at multiple meetings every day during the peak season. In order to protect fundamental shareholder rights, the FSC requires TWSE/TPEx-listed companies to incorporate electronic voting in the “Corporate Governance Roadmap (2018-2020)”. Currently, in the “Corporate Governance 3.0 - Sustainable Development Roadmap”, the daily maximum limit for shareholder meetings held by TWSE/TPEx-listed companies will be lowered to 90 and 80 in 2021 and 2022. Besides, emerging stock companies are required to implement electronic voting by 2023. In recent years, proxy fights are happening more often. Some companies which handle their own stock affairs try to seize control over the company by manipulating the check-in and voting process which infringe the shareholders’ rights. Hence, TDCC are planning to require listed companies which handle their own stock affairs to declare their qualifications every three years.
Please refer to the FSC website for more details about 39 specific measures and timeline of the “Corporate Governance 3.0 -Sustainable Development Roadmap”.
The QIC team consists of experienced professionals who previously worked at well-known equities houses and buyside funds. We have worked with many listed companies in Taiwan on improving their ESG communication and on attracting ESG-focused investors. If you are interested and looking for guidance in developing a successful ESG strategy, please reach out to us.